European Economic Issues
Exam Feedback Summer 2009
Below I repeat each question from the Summer 2009 exam and discuss the main
requirements for each question. Where relevant I discuss common errors. Within each
question marks were allocated in line with the Departments Marking Criteria as set
out in WebCT.
There was one problem which was common to a number of the exam scripts, that of
answering questions which were not asked. Some years ago the External Examiner for
this module suggested, and I agree with him, that there should be less questions on the
exam than topics on the course. That means that you cannot afford to only cover three
topics if you want to cover three questions. Every year, there are a few students who
prepare what they regard as a ‘banker’ question and then get a poor mark when it does
not come up. There appears to have been two such ‘possible’ questions this year
where people prepared answers and when the questions were not asked they recycled
the material as best they could. The two anticipated questions appeared to be a
question on tariffs (and trade creation versus trade diversion) and a question on
monopoly. Using this material to supplement another answer might get you a decent
mark, using it instead of another answer was unlikely to and a number of the failures
were a result of this strategy. The clear lesson for the future is that ‘question spotting’
is a risky practice and you should always make sure that you cover sufficient topics to
allow you a degree of choice and safety when answering an exam.
Exam Questions and indicative answers:
1.
All parts must be attempted
a) List the six reasons discussed in lectures as to why liberalizing
trade in the EU may bring benefits to the consumer.
[10%]
b) Using relevant diagrams, explain in more detail two of the
above reasons.
[50%]
c) Explain which of the six reasons above were more significant in
the move
from a European Common Market to the ‘1992’ European Single
Market?
[40%]
a. For part a) I wanted the six reasons for trade discussed and summarised a
number of times in lectures 2 &3 They were:
i. Trade due to difference in tastes
ii. Trade due to differences in technology
iii. Trade due to differences in factor endowments
iv. Trade due to increasing returns to scale
v. Trade due to differences in taxes (and other distortions)
vi. Trade due to market structure effects
b. In the case of i-iv I would expect you to use and explain clearly the diagrams
used in lectures 2 &3. Marks were awarded for the completeness and clarity of
the diagrams and explanation and while expositions of any two of cases i-iv
were acceptable, the marking recognised that some cases were more complex
than others, for example, case iii. Cases v and vi were only covered verbally in
lectures, I did not expect anyone to attempt formal explanations for these.
c. In lecture 3 we examined each of these motives and explained their
significance for the EU at its inception, at the establishment of the Single
Market and now. I expected to see a brief sensible general discussion of these
influences at the inception of the single market with the focus on the benefits
from returns to scale as technical and other barriers were removed.
For some reason some people used this question to discuss trade creation and
trade diversion. As you may have noticed there was no question on this topic on
the paper this year (all topics are rotated) and answering the question I didn’t ask
here was not going to change that fact. Similarly, some people tried to use this
question to answer a question on monopoly. Such answers were assessed solely on
the basis of how they addressed the question actually asked and typically they got
a very very low mark. The lesson: always prepare enough topics to be able to
answer at least three questions.
2.
All parts must be attempted
a) Explain, using diagrams, why there may be a special case for
government intervention in agricultural markets.
[40%]
b) Explain, using diagrams, how the EU used buffer stocks
(intervention) to support farm earnings?
[40%]
c) Evaluate the effectiveness of this policy both in terms of its
ability to maintain the level and stability over time of these
earnings.
[20%]
Answer to Q2.
a. I expected good students to introduce their answer by noting that agriculture is
often used as an example in perfect competition but yet it is one of the markets
most subject to intervention in the developed world (The very best might note
that by contrast it is typically taxed in the underdeveloped world). After that I
wanted a clear exposition of at least one of:
i. Effects of short-run shocks on prices and implications for
fluctuations in income and possibly consumers.
ii. Tendency in the agricultural sector to explosive or long cycles
with serious implications for annual incomes.
iii. Long-term decline in farming incomes due to low elasticities of
demand for agricultural produce,
Explaining these factors by reference to a diagram got a good mark. If you did
not use a diagram (as instructed in the question) you will have received a very
poor mark
But of course lots of industries experience these sorts of problems and
government do not intervene. So what is special about agriculture? Again the
best students mentioned:
i. Problems with financing income over the agricultural cycle due
being a sole owner with concentrated assets and earning
potential. – This contrasts with the industrial sector where
workers wages do not change much over the business cycle,
whereas the income from shareholders with a diversified
portfolio does. Thus shareholders provide considerable cyclical
protection for industry-specific labour.
ii. Note that long-term decline in farming incomes due to low
elasticities of demand for agricultural produce will result in
shift of people away from farming towards the cities, and this
may have implications for the social fabric of both rural areas
and cities.
Some people provided a very general and uncontextualised discussion about
ensuring steady supply of food, stable prices and protecting citizens from price
fluctuations. This would not get a very good mark. The discussion needed to
be more focused as above.
b. Here I expected a presentation and discussion of supply and demand and the
buffer intervention diagrams from lecture 4. A decent presentation would get
you a 2.2 mark (50-59). The better 2.1 students (60-69) will use the constant
unitary price elasticity of demand locus and will identify and discuss this). The
very best will discuss the differences and challenges in maintaining
agricultural incomes versus maintaining prices. Remember the question asked
about supporting earnings not prices. It was a common error to assume that the
simple buffer stock version stabilises income, it doesn’t, it only stabilises
prices.
Some people who included the PED locus and purported to discuss the income
issue failed to explain this properly and did not seem to appreciate the role of
the PED in determining how much of the surplus the EU should purchase. The
very very best would discuss the case where the PED locus is steeper than the
demand curve (as in the classes in weeks 5 & 6).
c. Here I was looking for a sensible discussion of the issues. I expected good
students to identify the incentive to increase supply due to the lower risk
associated with crops protected by a buffer-stock scheme, hence leading to
general problems with CAP such as butter mountains, wine lakes etc. I also
expected good students to note the general decline in farm incomes due to
low-elasticity of demand for food. It is also possible to discuss the issue of a
government target of stabilising prices as opposed to stablising incomes in this
section rather than in (b).
Some people focused on the durability of the agricultural product and the
practicalities and cost of storage. This is okay, but would want some of the
other points above as well.
3.
All parts must be attempted
a) Explain, using diagrams, how the switch in the EU from being a
net food importer to a net exporter in the world market affects
poor agricultural exporting economies.
[60%]
b) Outline the recent reforms to the CAP and explain the likely
effects on EU farming incomes and the supply of agricultural
goods.
[40%]
Answer to Q3.
a. In this question I expected to see a detailed exposition of the diagrams set out
in lecture 5 (PP Slides 15-18) to explain how the EU gradually moved from
being an importer of food on the world market to becoming a net exporter due
to the increased supply incentives associated with the CAP. Some people just
put the diagram down as a pretty work of art without providing any
explanation for the lines, the shifts or the resulting outcomes. This would not
get you many marks. I also expected you to explain how this led to increased
EU supply and a fall in world prices in agricultural goods, and hence a fall in
income for developing country exporters.
In some cases people (rightly) including the EU price support (intervention
price) in the diagram (slide 17) but then have not explained the additional
effect of this. If you want top marks (70+) you needed to do this.
Some people did not put down any diagrams at all. Given that the question
explicitly asks you to use a diagram this is problematic and again a very poor
mark is to be expected. In this module we are looking for your ability to
systematically think about economic issues, and to systematically explain your
analysis. A discursive essay will therefore not attract a good mark.
b. Here I expected you to discuss the various reforms of the CAP, including
MacSharry and more recent reforms, and briefly indicate some of their effects
diagrammatically.
4.
All parts must be attempted
a) Explain, using diagrams, why a currency devaluation is similar to
an increase in an import tariff.
[50%]
b) Is a currency devaluation a good way to help a domestic importcompeting industry which is suffering as a result of competition
from industries located in other EU member states? Evaluate
the likely impact on the struggling industry and on UK export
industries in the short and the long-run.
[25%]
c) Why do you think the EU continues to allow some members to
retain their own currency if managed floats can have real effects
on other members’ economies?
[25%]
Answer to Q4.
a. For this part of the question I expected a conventional diagrammatic analysis
based on lecture 6. Marks were awarded for the completeness and clarity of
the diagrams and exposition. It would be fair to say that the quality of the
explanations was very variable and I think I will take another look at the
lectures on this topic for next year as some answers lacked clarity.
b. Here I was hoping for a short discussion on the use of targeted support for a
specific failing industry or group of industries via a tariff versus a change in
the exchange rate which affects all industries. Because a depreciation or
devaluation affects all industries and all importers and exporters it is not a
particularly targeted form of intervention. Not that many people got this point.
A lot of people discussed the short-run versus the long-run impact of an
exchange rate depreciation and the fact that in the long run this was likely to
result in higher import prices and increased inflation until the original real
equilibrium prices were restored. This was valuable.
c. Here I was expecting a discussion of advantages and disadvantages of dirty
floats, in particular the appropriateness of their use as a policy instrument to
promote trade in the context of the EU Single Market (while use of tariffs or
subsidies are not allowed).
5.
All parts must be attempted
a) Outline, and briefly explain the six criteria discussed in lectures
for an optimal currency area.
[50%]
b) What does Optimal Currency Theory presume about the
effectiveness
or otherwise of monetary policy as a means of influencing
output?
[10%]
c) Evaluate the extent to which the UK can be regarded as an
optimal
currency area.
[40%]
Answer to Q.5
a. Here I expected a brief explanation of the three economic and three political
criteria as set out in lectures. That means at least a sentence or two not just on
what each criteria is, but why it matters. For example, lots of people explained
that labour mobility involved people moving from one country to another
(fairly obvious you would think) but far fewer explained why it is significant
for OCA theory? ANS: Because if there is a negative shock in France and a
positive shock in Germany then the unemployed can move from France to
Germany to find work thus obviating the need for each country to use
monetary or some other policy as an instrument to counteract unemployment
(in France) and excess demand for workers (in Germany).
b. Unfortunately this is a question where people were frequently mixed up.
While some people referred to the point I made in lectures, they were usually
unclear as to the actual implications. The point is a little bit subtle, and maybe
too complex for first year (which is why it is only worth 10%) so I will explain
it again.
There is a debate between economists on how effective monetary policy is as
an instrument for controlling the level of output in the economy. If it is
ineffective, then there is no real debate about Optimal Currency Areas, if you
can’t use your national currency to influence output you might as well have a
single EU currency anyway as it reduces transactions costs and encourages
trade between countries. So in this case we do not need to discuss the OCA
criteria.
But OCA deals with the case where monetary policy is effective (so giving it
up represents a real cost) and this has to be measured against the benefits from
a single currency. So the six criteria map out the conditions that should be
satisfied if a single EU currency is to be preferred to national currencies. So in
summary, OCA theory is predicated on the assumption that monetary policy
can influence real variable to some degree and therefore sacrificing currency
may have real costs which must be assessed alongside the benefits.
As I said this is a subtle point, and requires a very good (first class honours)
level of understanding. If you mastered this you probably got a very good
mark on the rest of the question as well.
c. Here I wanted a brief discussion of the UK as an optimal currency area based
on the discussion in lectures. Eh, for the handful of people that think the UK
does not have a single currency ………… it does! There may be Scottish and
Northern Irish Bank notes but they are still Sterling and are issued with the
permission of the Bank of England.
6.
All parts must be attempted
a) Explain why widening the bands within which currencies could
fluctuate in the Bretton Woods system from 1% to 2.25% could
have led to a possible 9% fluctuation between the German
Deutschmark and the French Franc.
[50%]
b) Outline and evaluate the subsequent exchange rate
arrangements that were developed in Europe in the wake of
Bretton Woods leading up to the establishment of the European
Currency area in order to reduce bilateral-currency fluctuations.
[50%]
Answer to Q6.
a. Here I was expecting you to explain the diagram used in lectures and repeated
in the textbook to demonstrate the point. Marks were be awarded for the
completeness and clarity of the diagrams and exposition.
b. This was the one largely narrative type question on the paper and was based
on the material discussed in the lecture and in the textbook. Because it does
not require a high level of analysis it is hard to demonstrate profound
economic insights in this question (but it is possible) so it is difficult to get a
very high score. On the other hand if you knew your stuff, it is less difficult to
fail. Not many people did the question, those that did and who knew what they
were talking about generally performed quite well.
7.
All parts must be attempted
a) In broad terms, describe the pattern of economic activity across
Europe and assess the extent to which economic activity differs
within countries compared with differences between countries.
[30%]
b) Explain how we might use economic theory to explain these
differences.
[70%]
Answer to Q7.
a. Here I expected a discussion of the core versus periphery concept and some
discussion of the main areas of economic activity in EU based on the lecture
material. You should have noted that there are as many differences within EU
countries as between them and that in the case of the EU15 that there has been
substantial convergence between countries in the main aggregate economic
indicators while differences within countries persist despite no apparent
barriers to trade.
b. In this section you should have made the point that conventional trade theory
can be used as the dominant explanatory theory of trade between EU countries
while new economic geography (NEG) may be a more important explanation
of economic patterns within countries. I would expect some brief discussion of
each theory (the six trade motives from Q1a. for example and agglomeration
and dispersion forces, backward and forward linkages in the case of NEG).
For the purposes of the question the latter NEG ideas were more important.
Obviously the level of explanation expected is that of a first year student not
more formal analysis. However marks were awarded for the clarity, depth and
extent of the discussion consistent with the departments marking criteria.
It was not clear that everyone who attempted this question had attended the
final lecture as some of the answers were just an application of general
economic knowledge. They thus failed what we call ‘the (wo)man in the pub
test’. Put another way, does the answer reveal that the person has in fact
studied some economics on the course (and the final lecture in particular) as
opposed to being an intelligent well-read ordinary person. If you failed this
test you were unlikely to get a decent mark on this question. Given that you
could have chosen any one of the other 6 (or more strictly correct, anyone one
of the four you had not already answered) this would have been a strange
choice. Those who had clearly gone to the lecture did well on this question.